How to Retire on $300,000

You might not need millions after all

Senior woman and young woman looking at mobile phone
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You might hear big numbers like $2 million if you explore how much money you need to retire. But do you really need that much? Can you get by on something substantially less than that and still live comfortably?

The answer may be "Yes" for some people, but the real question is whether you have the financial resources to support your level of spending for the rest of your life. To figure that out, you have to know how much income a couple might expect with $300,000 in a retirement account.

The example below might not match your situation perfectly, but you can apply the same concepts and calculations to help figure out your retirement plan.

Key Takeaways

  • Retiring on $300,000 may be possible for some people, but you'll need to have a strategy in order for that to work.
  • Social Security, pensions, and other sources of income can help supplement any money you've saved.
  • Be sure you're prepared for healthcare costs, taxes, market losses, and other factors that may impact your money in retirement.

Sources of Retirement Income

You’ll probably receive some retirement income from Social Security, or possibly a pension, in addition to whatever you've saved. Start planning your retirement by understanding how much base income you will receive. These are “guaranteed” sources of income that should continue regardless of how much money you’ve saved on your own. Social Security and pension income are two of the most common.

Social Security

More than 50% of people over age 65 get at least half of their income from Social Security as of 2021. Almost 90% of individuals over age 65 receive Social Security benefits.

The average Social Security retirement benefit as of June 2021 was $1,555 per month, which works out to $18,660 per year. You might receive more or less, depending on your earnings and when you claim your benefits, but we’ll assume an average annual income of $18,660 per year from Social Security and that a couple are living together, so they receive a total of $37,320 annually.

A single person could still retire on $300,000 in savings, but they would likely need to be stricter about their budgeting and expenses.

Pensions

Pension payments would ideally supplement your Social Security income, although they may replace it altogether if you worked for government organizations. Pensions can reduce or eliminate Social Security benefits in some cases, but we might assume that you’ll get a similar—or higher—amount from your pension if that happens.

Additional Income Sources

If you have additional sources of “guaranteed” income, such as annuity payments or royalties, add them to your base amount if you expect it to last for the rest of your life.

Suppose the couple in our example receive no pension or additional sources of income. So far, we have a base of $37,320 ($18,660 per person) in Social Security income. Your savings can supplement that income if it's not enough to support your needs.

Ask the pension administrator what happens if your spouse or partner dies if you rely on a spouse's pension income. It might go away, leaving you with a shortfall. But you could potentially receive survivor benefits, such as 50% or 100% of the monthly amount. You might also qualify for survivor benefits under Social Security.

Spending From Retirement Savings

How much income can you expect your savings to produce? One rule of thumb is to assume that your savings will last 30 years if you withdraw at a rate of 4% annually and adjust for inflation. That might look like the following in our example:

  • 4% of $300,000 is $12,000.
  • The couple withdraw $12,000 from savings in the first year.
  • Inflation during the year is 1.5%.
  • 1.5% of $12,000 is $180, so they increase the following year’s income by that amount.
  • In the second year of retirement, they withdraw $12,180 to account for higher prices.

Assuming flat returns and a beginning-of-year payout, the couple’s retirement account would have to outpace inflation by at least 1.5% per year to support at least 30 years of withdrawals. Your money has to grow for the plan to work.

Risk-free investments such as bank accounts might not provide the returns you need, while high-risk investments such as individual stocks could deplete your savings too early. The 4% rule was originally designed for a portfolio that invested half in stocks and half in bonds, but that allocation might not be right for you. Ask a financial advisor for help designing and implementing an investment mix that’s tailored to your needs.

The 4% rule is great for getting a ballpark idea of your retirement readiness, but it’s not perfect. It’s best to complete a thorough analysis of your spending needs and estimate your annual cash flows in retirement. Still, this rule of thumb is helpful. You'll know that some things will have to change if you have $300,000, and $12,000 per year is nowhere near what you need to retire comfortably.

Our couple has $37,320 in base income at this point and $12,000 of withdrawals per year. The total annual income is $49,320 in the first year.

The 4% rule aims to find a “safe” withdrawal rate, but there's no guarantee that your money will last 30 years. Bad timing, uncooperative markets, and other factors can potentially derail your plan.

Can I Just Live Off the Interest?

One romanticized version of retirement is to build up a nest egg and live off the interest. In that case, your principal remains untouched, you can dip into those funds as needed, and you pass assets on to your heirs. But living off the interest requires a substantial amount of money.

Even if banks were to pay a 1.5% annual percentage yield (APY) on your savings, you’d receive $4,500 per year on $300,000. You’d need $800,000 saved in that account for retirement to generate $12,000 in interest at that rate. A more realistic expectation is to spend down your assets over time—and it’s critical for that money to last for the rest of your life. The 4% rule and other strategies attempt to make that a reality.

Prepare for Healthcare Costs

You’re typically responsible for 100% of your health insurance premiums when you retire. The added expense can come as a shock if your employer has been paying some or all of that amount. A 65-year-old couple should expect to spend $295,000 out-of-pocket in retirement, according to Fidelity Investments, and that number does not include potential long-term care expenses.

While $295,000 is enough to nearly wipe out the $300,000 we’re working with, you won’t necessarily spend all of that money up front. Fidelity estimates that a 65-year-old couple might spend around $11,400 in the first year of retirement. Social Security or other income sources can help cover that, but it’s almost a quarter of the $48,000 our couple has to spend annually. They’d have just $36,600 left after those healthcare costs.

A nest egg of $300,000 does not leave much of a buffer if you face high medical expenses.

Most people enroll in Medicare at age 65, but you'll have to arrange healthcare on your own until you’re eligible for Medicare if you retire early. An individual policy through a state exchange, coverage through COBRA, or a spouse’s plan are some other options to consider.

What About Income Taxes During Retirement?

It’s crucial to estimate taxes for a detailed retirement plan. Expect to pay income tax when you withdraw those funds if your money is in a pre-tax retirement account such as an IRA, 401(k), 403(b), or 457. Additional tax penalties may apply if you’re younger than age 59 1/2 when you take withdrawals, but there are some exceptions.

Fortunately, taxes might not be a substantial burden if you’re planning to retire with $300,000.

Is Social Security Taxable?

Most of the income in our example comes from Social Security benefits, which are not taxable if your annual “combined income” is less than $32,000 for a married couple filing jointly or $25,000 for individuals. Your combined income is:

  • Your adjusted gross income
  • Nontaxable income
  • Half of your total combined Social Security income

Our example couple's taxable income includes $12,000 per year from retirement savings plus the $18,660 of annual Social Security benefits (half of their total combined Social Security income, or half of $37,250). That total, or $30,000, is below the threshold for a couple filing jointly, so Social Security benefits would not be taxable.

Federal Income Taxes

Federal income tax liability might be quite low as well. A married couple filing jointly has a standard deduction of $25,100 for tax year 2021, increasing to $25,900 in tax year 2022. That easily wipes out the taxable income our couple has. You could plan to spend all the money you receive without needing to budget for federal income taxes in this example.

Taxes can be complicated, and the rules change periodically. Review your numbers with a tax professional before you make any big decisions.

Potential Pitfalls

You can improve your chances of success if you familiarize yourself with some of the challenges you may face if you retire with $300,000 and follow the 4% rule.

Spending

The amount you spend is one of the most important pieces of your retirement plan because it determines how much you'll need.

Track your spending for several months to become familiar with it, or review transactions in your bank and credit card accounts going back several months. Remember that you might eliminate some expenses, such as mortgage payments or costs related to your commute, during retirement. But you might also accumulate more expenses, such as increased premiums for healthcare coverage.

Market Losses

Investments can help grow your money and keep up with inflation, but it’s always possible to lose money in the markets. The first few years of your retirement are especially critical.

You could run out of money sooner than expected if you take withdrawals when the market is down, particularly at the beginning of your retirement. It’s smart to assess your risk as you approach retirement, and to review your investments regularly, especially in the early years.

You might be able to adjust your withdrawal strategy and reduce the damage if you suffer from bad timing, such as retiring at the beginning of a market crash. Consult with a financial professional before losses get out of hand.

Is Retiring on $300,000 Realistic?

Having $300,000 at retirement might allow a couple to spend $48,000 per year in our example, or about $37,000 after healthcare expenses, but that might not be enough for you. It depends on where you live, your healthcare expenses (which involve several unknowns), and other factors.

Moving to a less expensive area—even a less expensive country—is one strategy to make your income go further. Rural areas in the U.S. tend to have lower costs of living than large metropolitan cities and the suburbs surrounding them.

What to Do If Your Retirement Savings Is Not Enough

What if you run the numbers using your own Social Security and pension income, but it’s not enough for you to retire comfortably? There are several ways to address that shortfall, but the options might not appeal to you, or they might not even be feasible.

Delay Retirement

Working longer gives you more time to save, which increases the amount you can withdraw later. You can add big value to your Social Security calculation if you're in your highest earning years. That, along with claiming Social Security and pension benefits at an older age, may result in a higher monthly income. You’ll have fewer years left to fund, which may make it easier for the money to last.

Reduce Spending Goals

Retiring becomes easier if you can live on less, but at some point, this becomes risky at some point. It's dangerous to cut things too close with unknown healthcare expenses and potential difficulty re-entering the workforce.

Evaluate Home Equity Options

Home equity can be used as a resource to supplement retirement savings, but it has to be accessed. Consider downsizing. It makes sense anyway if your children are out of the home or if you want a place with no stairs so you can reduce the risk of falls as you age.

Alternatively, you might be able to borrow against your home with a reverse mortgage. It can be risky to put your home on the line, and you might want to preserve that resource for medical expenses, but that could be the least bad solution for your income needs if you're faced with several tough choices.

Get Help

Almost anybody can handle the tasks required to prepare for retirement, but making projections and managing investments can take time and energy. Enlist help from a financial planner if you'd rather not do it alone. A fee-only advisor may also help you get the answers you need without charging commissions.

Frequently Asked Questions (FAQs)

Where can you retire on $300,000?

If you're hoping to retire on a small amount of savings, it may be smart to look at areas with a low cost of living. Some of the cheapest places to retire include San Antonio and Harlingen, Texas; Jacksonville and Cape Coral, Florida; Pittsburgh, Pennsylvania; and Knoxville, Tennessee. Some states are more tax friendly for retirees, as well.

How much should I save for reitirement?

Your retirement savings target will depend on your lifestyle goals, health, and other wants and needs in retirement, and there are several ways to estimate what you'll need. One general rule of thumb is to plan on having $240,000 saved for every $1,000 per month you'll need in retirement income.

What is the average retirement savings?

According to survey results from Fidelity, the average balance in defined-contribution plans like a 401(k) was $126,083 as of the third quarter of 2021. Similarly, the average IRA account balance was $135,700. For those who had both types of accounts, the average total was $382,800.

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